A look at what will happen next in the world economies
Saturday, October 31, 2015
States to Help Workers Save for Retirement
Australia put in place enforced retirement savings some 20 years ago. Interesting again how this is just starting to come to the USA. Aivars Lode
By David Harrison
Rose Hackenbruck knows she should be saving for retirement. But with a mortgage and a daughter to raise on about $43,000 a year, the 39-year-old bartender in Portland, Ore., doesn’t have much left at the end of the month.
“That money quickly goes away if you don’t have something structured already set up,” said Ms. Hackenbruck, who is divorced. Her employer, like many bars and restaurants, doesn’t offer retirement benefits.
Something structured could be coming her way soon.
In July, Oregon became the third state to enact legislation creating automatic individual retirement accounts for workers who don’t have retirement plans at work. The plans are an attempt to cushion the blow for millions of workers who could someday find themselves too old to work but short of savings, state officials said. They are also an attempt to protect taxpayers in the future, said Oregon Treasurer Ted Wheeler.
“If people have not saved, they’re completely dependent upon government safety-net programs,” Mr. Wheeler said.
The gradual but broad shift away from old-fashioned pensions—which provided lifetime retirement payments to retirees—has left millions of Americans unprepared for retirement, experts say.
In the private sector, nearly 44% of prime-age workers don’t have access to a retirement plan at work, according to Labor Department figures analyzed by Nari Rhee, a researcher at the University of California, Berkeley. About 46% of private-sector workers now take part in a workplace retirement plan, meaning almost 10% of workers have access to a plan but don’t participate.
“It’s shocking…that less than half of employed adults are covered by any kind of employer plan,” said Alicia Munnell, director of the Center for Retirement Research at Boston College, which is working with Connecticut to set up a program. “There’s just a huge coverage gap out there.”
California was the first state to pass legislation in 2012 setting the stage for automatic retirement accounts for workers without coverage. Illinois enacted a similar law in January. Connecticut’s plan could be in place by next year, and legislation is pending in New Jersey and Massachusetts. In some states, such as Maryland and Maine, efforts have foundered in the legislature. For now, only Democratic-controlled legislatures have enacted the plans.
The initiatives differ in the details, but all would feature automatic paycheck deductions—California, Oregon and Illinois are contemplating 3%—to be placed in individual retirement accounts. In all three states, workers would be automatically enrolled a feature designed to overcome people’s inertia about saving, but would be allowed to opt out. State boards would manage the programs. In Oregon, the plans would apply to all employers regardless of size, but California and Illinois exempt smaller employers.
The Oregon plan also could benefit self-employed and temporary workers. That would be good news for Diana Bartlett, who left a full-time job with benefits four years ago after she had her second child. Since then, she said she has worked a series of short-term jobs without retirement plans. “It makes me nervous that I have so little retirement savings,” said Ms. Bartlett, who hasn’t contributed to a retirement plan since she left her full-time job and estimates she has about $3,000 saved from her previous job.
For now, the state plans—even those passed by legislatures—are in the development stages, and none has yet begun withdrawing money from paychecks. But the idea has caught on. At least 18 bills have been introduced in 15 states this year dealing with state-sponsored retirement plans, up from 10 bills in seven states in 2013, according to the National Conference of State Legislatures.
“Given the proliferation [of bills] over the past few years, I think in 2016 you’ll see even more,” said Sarah Mysiewicz Gill, senior legislation representative at AARP, which has been advocating for the plans.
But a 41-year-old federal law protecting workers’ retirement investments could complicate the state efforts. The Employee Retirement Income Security Act places record-keeping requirements on employers who offer retirement plans and could make them liable if employee contributions aren’t invested properly.
The question is whether those requirements would apply to employers under the state-run plans, even if their role is limited to setting up the automatic deductions in the same way they set up payroll-tax deductions. If they do, that could be costly to employers and could erode support for the plans.
The Obama administration supports the state initiatives and has promised to unveil rules this year to help states navigate the regulatory pitfalls, which could clear up the ERISA question. The financial-services industry and some state chambers of commerce, however, oppose the plans, saying they risk drawing employers into the regulatory thickets of ERISA.
“This is simply a state-government approach to try to solve a retirement problem that is better left to the private sector,” said John Mangan, regional vice president for state relations at the American Council of Life Insurers. “We question whether the state should enter a private marketplace that already has robust options for retirement plans for individuals and businesses.”
In response to industry concerns, Washington state enacted a compromise encouraging the private sector to set up voluntary individual retirement accounts for workers without access to workplace plans. Employers wouldn’t be charged administrative fees. Management fees on employees would be capped at 1%. And the state government would promote the accounts.
The idea, which industry supports, could be a model for states where the Oregon model is politically unfeasible, said state Sen. Mark Mullet, who sponsored the bill. That is likely to depend on how popular the plans are with employers, but Mr. Mullet is optimistic.
“The business owners, to be honest, most of their hearts are in the right place,” he said. “They would be happy to offer something, if it’s no skin off their backs.”
Whatever their design, the state plans wouldn’t guarantee a comfortable retirement for future generations. A study by the Employee Benefit Research Institute, a think tank funded by insurers, companies, unions and others interested in retirement issues, found that a mandatory 3% deduction would reduce the overall retirement-savings shortfall for working-age households by only 6.5%, in part due to the rising cost of long-term care for the elderly. Still, supporters see the plans as a first step, one that can be expanded upon later.
In Portland, Ms. Hackenbruck said she is ready to give up a bit of her paycheck for a slightly more comfortable old age. “I’m not trying to get rich,” she said. “I’m just trying not to be an impoverished old woman.”